Is a Recession on the Horizon?

Update on Inflation, Talent Shortages, Oil Supply, and “Unacceptably High Prices”

Consumer sentiment is now at the lowest point on record, 50 on a scale of 1 to 100. That's the lowest since they've been recording the data since 1952. Oh, my goodness. And 75% of Fortune 500 CEOs believe a recession is inevitable. The top threats, they say 24% blame it on talent shortage. They can't grow their businesses because they can't find the workers. 21% say the big threat is inflation, 15% say geopolitics. I think that's code for Russia and 13% blame it on cybersecurity. That, to me, is perhaps the most worrisome of all. 

Just to illustrate for you that talent shortage that they mentioned being a problem... Let me just give you one almost silly - it's not really silly, but in the scheme of things, I guess we have to put it that way - a national shortage of lifeguards. Only 12% of the nation's pools and beaches are fully staffed for the summer. Austin has 462 lifeguards. That's a lot, but it's only two thirds of what they need. So they've opened only half of the city's pools this year. New Orleans pools are open for only two days a week instead of the typical five or six. And in New York City, they've canceled their aquatic programs, including free swimming lessons.

Philadelphia is opening only 50 of its 63 pools. And even then, on a rolling basis, that's lifeguards. This isn't in a for profit enterprise in most cases. These are public facilities, pools, and beaches. Imagine if you can't even get workers for that. Imagine businesses trying to find workers to run their operations. This is a real problem.

Related to all of this, the Secretary of the Treasury, Janet Yellen, says unacceptably high prices, that's her phrase, not mine, will last for the rest of the year. She said, “We’ve had high inflation so far this year and we're going to have higher inflation for the rest of the year". Inflation was 9% in June. If inflation is only 4% in October, does that mean prices are lower? No means they're higher yet. This is year over year. In other words, just because inflation comes down, doesn't mean that prices are as low as they were a year ago.

High Gasoline Prices – Not Just Supply and Demand

Don't get too excited. Even if they say the rate of inflation is dropping, inflation is bad and it's not going to get any better any time soon. One big question that a lot of folks are asking these days is all about oil prices, gasoline prices. And the big issue is, well, look, if it's a supply/demand issue and clearly high oil prices are resulting in high gasoline prices, well, that's simply because we have so many people wanting to buy gasoline. There's not enough gas to go around. And that's causing high prices. Supply and demand. So why don't they just pump more oil? That's the question so many people are asking.

Well, here's the answer. You can't. I mean, it's just not that simple. You see, during the embargo, during the lockdowns, during the COVID crisis, companies shut down the wells. They laid off thousands of workers during the pandemic. Now we realize we're out of all that. Let's get everybody back to work. Well, starting a rig can take eight months, and that assumes there's no supply chain shortage.

And Wall Street is telling all of these big oil companies not to spend money doing that. Don't use money to put it into new oil production. Take all the money you've got and use it to pay dividends. That's what shareholders want to see. Even if we got more oil production tomorrow, it can't be turned into gasoline terribly quickly. And that's because we don't have enough oil refineries. Since 2019, we've lost 5% of our refining capacity. That's more than a million barrels a day. Few new refineries have been built in the last several decades, and none are planned right now. 

And President Biden has little ability to do anything about it. I'm not suggesting criticism, good or bad, on President Biden. It's just any president really is limited in their ability. I mean, Biden, he's criticized the CEOs of oil companies. He began releasing a million barrels a day from the US Strategic Petroleum Reserve. He's talking about suspending the federal gas tax of $0.18 a gallon, but none of that is going to have any impact for months or even years.

Meanwhile, the oil companies are posting record profits, but they don't control oil prices.

Exxon Mobil made $23 billion last year. The year before that, they lost $23 billion. So the oil companies are victimized by the oil market as much as everybody else. The only question is, what do they do with their profits? Do they plow their profits into capacity production or do they take their profits and pay them out as dividends to their shareholders. It's the latter that they're doing because that's what the shareholders are demanding. And so here we are with the mess that we're in. No quick fix any time soon. You're probably struggling in this economic environment. Everybody is with this radically high rate of inflation and high interest rates going along with it. Odds are pretty good your paycheck has not risen at the same rate of inflation, and as a result you're seeing it more expensive to buy just about everything food, gasoline, cost of education, health care, you name it. The prices are higher. Wouldn't it be great if you were earning a lot more money than you are? Say, a quarter of $1 million?

Scraping By on Just $250,000 a Year

Well, new research has just come out and 30% of Americans who are earning a quarter of $1 million or more, they're living paycheck to paycheck, just like maybe you. 13% of Americans who are earning a quarter of $1 million or more - 13% of them, have a below average credit score. In other words, it's our own personal behavior. That has to be the focus here. Just because you make a lot of money doesn't mean that you're going to be doing well financially. People often tend to spend up to their incomes.

Think about it. Oh, sure. Somebody with a quarter of $1 million is probably living in a really nice house, driving a really nice car, taking really great vacations, lots of jewelry and wonderful clothing and big screen TVs, etc. But at the end of the day, if they're spending as much as they're earning, then they're going to be just as broke as if they were doing the very same with a $50,000 income instead of a $250,000 income.

Living Below Your Means

The key is to spend below your income level, live below your means. Otherwise, you'll just be as broke with just as much financial stress and pressure and greater likelihood of financial chaos. Because it's a whole lot easier to lose a job at a quarter of a million than it is to lose a job at $50,000. So we need to recognize in the midst of everything going on, it's our own personal behavior that we really have to pay attention to. And if all you want to get out of this mess is, oh, well, let the government solve it for me, why don't I just get more stimulus checks?

Did Stimulus Checks Have Any Lasting Impact?

Well, new research has just shown that of the trillion dollars in stimulus checks that were sent to US households during the pandemic, it had no lasting impact on anybody's financial well-being. And in some cases, it actually increased their feelings of distress. This research comes from Harvard. They surveyed 5,000 people living in poverty. What they discovered is that two weeks after getting the money, these folks had higher bank balances. But within a month, the bank balances fell back to prior levels, and the recipients also did more poorly on financial, psychological and health measures.

In other words, getting the money was nothing other than a quick fix. Kind of makes you think of somebody with a drug habit. They might think they're feeling better for a little while, but in fact, it's not doing them any long-term good and actually causing long-term harm. You think maybe the government will think twice the next time they're ready to throw trillions of dollars at households across the country?

Who to Trust? Cheating on an Auditing Exam

And then there are corporate auditors. As we're trying to deal with all this situation, we really rely on our corporate auditors to make sure that our big corporations are dealing with us honestly, that they're telling us the truth about how much money they're earning and how much money they're spending. These corporate auditors are CPAs, and they verify the accuracy of corporate financial statements, and they issue warnings to investors if they find problems. Auditors have to take a robust exam to get their CPA license. They have to take annual exams to keep their licenses to prove that they're knowledgeable and up to speed on the latest laws and regulations. For the past five years, hundreds of auditors at Ernst and Young cheated on an exam, and the firm is now paying $100 million in fines. The exam that these hundreds of auditors cheated on? An ethics exam.